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Legal News | 13.04.23

Inheritance Tax 101…or is that 325 or even 175?

Regular readers of our newsletters will know that we write about a wide-range of topics, including the dreaded taxes – Capital Gains Tax, Inheritance Tax and Income Tax – but how much do you know about Inheritance Tax (IHT)?  Here is a (very) brief summary of how IHT is calculated on death.

How do I work out what I pay IHT on?

IHT is a tax that may be paid on the value of a person’s estate when they die.  The value of an estate is calculated by adding together all the deceased’s assets, including property, bank accounts, investments, and personal possessions and then deducting any liabilities that exist at the date of death, such as credit card and utility bills and funeral expenses.

In addition, any gifts made in the seven years prior to a person’s death may also be brought into account when establishing the value of the estate for IHT purposes.

Are there any reliefs or exemptions?

Once the value of the deceased’s estate has been established, any applicable exemptions or reliefs will be applied.  For example, if some or all of the deceased’s estate passes via their Will or intestacy to a surviving spouse/civil partner or to a registered charity, an exemption will apply.  Similarly, if the deceased’s estate includes qualifying business or agricultural property, then Business Property Relief (BPR) or Agricultural Property Relief (APR) may apply.

What about my IHT free allowance?

For IHT purposes, every individual is entitled to a nil rate band sum (currently fixed at £325,000 until 5 April 2026).  An additional residence nil rate band sum (fixed at £175,000 until 5 April 2026) may also be available if the deceased’s estate includes an interest in a residential property which passes (either via their Will or intestacy) to one or more of their direct descendants (such as a child, step-child, grandchild).  Both nil rate bands are transferable between spouses/civil partners.

In the case of a married couple or those in a civil partnership, if, on the first death, the deceased leaves everything to their surviving spouse/civil partner, the full spouse exemption will apply so no nil rate band sums will be utilised.  This means that on the second of the couple’s deaths, any unused nil rate band(s) from the first death can be transferred and applied against that spouse/civil partner’s estate.

By way of example, if Tom dies and leaves his entire estate to his wife Barbara, spouse exemption applies, so Tom utilises none of his nil rate band and no IHT is payable.

On Barbara’s subsequent death, her estate (including anything inherited from Tom) is valued for IHT purposes at £1,000,000.  Barbara has made no lifetime gifts and no exemptions or reliefs apply.  Barbara’s Will leaves her entire estate, including the family home, to her and Tom’s children.

This means that Barbara’s executors are able to claim Barbara’s full nil rate band (£325,000), as well as Tom’s unused nil rate band (£325,000), making a total combined nil rate band of £650,000.  In addition, because Barbara’s estate includes an interest in residential property, which she is leaving to her direct descendants, her executors can claim both her residence nil rate band (£175,000) and Tom’s unused residence nil rate band (£175,000).  Barbara’s estate therefore has the benefit of a combined nil rate band of £1,000,000 meaning that no IHT is payable on her death.

At what rate is IHT paid on death?

To the extent that the deceased’s estate, reduced by any available exemptions and reliefs (as outlined above), exceeds their available nil rate band sum (nil rate band and residence nil rate band, where applicable), IHT is charged at a rate of 40%.  Where at least 10% of a person’s qualifying estate passes to charities, IHT may be charged at a reduced rate of 36%.

For further information on Inheritance Tax, please get in touch with your usual Wansbroughs’ contact or email the Private Client Team at wealth@wansbroughs.com.




Posted By Our Wills, Tax, Trusts & Probate Team